Chancellor George Osborne announced his budget yesterday at 12:30pm. The Budget sets out a five-year plan to rebuild the British economy targeting (a) deficit reduction, (b) enterprise, and (c) fairness.
Although we expect this Budget will cause some pain for the economy, the effect it has on our clients will be minimal from a tax planning perspective. The highlights are below;
Corporation tax
The tax rate for small companies will reduce from 21% to 20% for our clients effective from 01 April 2011 – a good result! The tax rate for large companies will also reduce from the current 28%, to 24%, over a four year period, in line with the Governments aim to create the most competitive corporate tax system in the G20.
VAT
The main standard rate for VAT increases from 17.5% to 20%. For our VAT registered clients the effect of this will largely be neutral. For our non-VAT registered clients you will see a increases in your business expenses (such as our accounting fee). The VAT rate increase takes effect from 04 January 2011.
Capital Gains Tax
This was a very controversial issue for small business owners, and for the most part Capital Gains tax for business owners is unchanged. For individuals with earnings up to the higher rate earnings threshold (£43,875), the capital gains tax rate remains unchanged at 18%. Higher rate tax payers will pay 28% from midnight on 22 June 2010. Entrepreneurs relief is still available however for business owners looking to sell or wind up their company (using ESC C16) and the chargeable capital gains tax is capped at 10%, which is very good news.
Annual Investment Allowance
The purchase costs of company assets can be written off in the year of purchase under the Annual Investment Allowance – this scheme was introduced in 2008, and currently the annual allowance is capped at £100,000 (our clients never reach this threshold). From 2012, this allowance will be reduced to £25,000 per year – still more than enough for our clients to ensure they get a get tax deduction for the full purchase cost of any assets, in the year the asset was purchased.
IR35
The Conservatives have always stated they wanted to revisit the IR35 legislation with a view to modifying it, or eliminating it. Paragraph 1.69 of the Budget states “The Government remains committed to a review of IR35 and small business tax and will release further details shortly.”